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2016 (1) TMI 132 - ITAT DELHI

2016 (1) TMI 132 - ITAT DELHI - TMI - MAT computation - adjustment on account of provision for gratuity and leave encashment while computing the book profits for the purpose of Section 115JB - Held that:- As decided in own case claim of the assessee has to be accepted in the light of decision of Honíble Supreme Court in the case of Bharat Earthmovers Vs CIT (2000 (8) TMI 4 - SUPREME Court) wherein it has been held that liability incurred by the assessee under the leave encashment scheme applicab .....

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ility. This report has not been relied upon by the revenue authorities below. There are specific defect in the report. Taking into consideration the findings of the ITAT in assessment year 2000-01, defects in the report and the claim of assessee that in assessment year 2000-01, a miscellaneous application has already been filed. We deem it appropriate to set aside this issue to the file of the Assessing Officer for re-adjudication. - Decided in favour of assessee for statistical purposes.
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were purchased from the local market, just to retain the Star Export House status. The loss incurred by the assessee was only on account of foreign exchange fluctuation. The structure of the transaction was such for the assessee that it could not make any profit or incur any loss as the transactions were not being undertaken for the sake of any profit. We, therefore, are of the view that the addition made by the AO and sustained by the ld. CIT(A) on account of armís length price was not justifi .....

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ts as discussed herein above the addition sustained by the ld. CIT(A) is deleted. - Decided in favour of assessee

Re-computation of depreciation - contention of the Revenue is that explanation 5 to Section 32(i) of the Income Tax, which is inserted with effect from 01.04.2002 was clarificatory in nature and therefore the Assessing Officer has rightly disallowed the depreciation - Held that:- Issue has been decided in favour of the assessee by the Honíble Jurisdictional High Court in t .....

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be clearly wrong when the depreciation in the previous year has not been claimed at all. - Decided in favour of assessee

Allowability of the expenditure on the improvement of lease hold premises u/s 37(1) - Held that:- As decided in assessee's own case expenditure to be treated as Revenue in nature. The finding of fact is a direction that improvement were made in the lease premises by erecting temporary wooden portion and structure, and therefore, the same were revenue in nature and .....

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expense over a period of ten years and, therefore, for all these ten years, the expenditure is eligible for deduction under Section 35D of the Act.- Decided in favour of assessee

Disallowance of advertisements expenses related to glow signs and neon sign - CIT(A) deleted the addition - Held that:- As decided in assessee's own case for the assessment year 1999-2000 by putting the neon signs and glow signs, no asset of permanent nature is created. Simply because self-life of such neon .....

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t are directed against the order dated 23.12.2009 of ld. CIT(A)-XX, New Delhi. 2. In these appeals some common issues are involved and the appeals were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity. 3. In the assessee s appeal following grounds have been raised: 1. The Commissioner of Income Tax Appeals-XX, New Delhi (hereinafter referred to as the Ld. CIT(A) ) has erred on facts and circumstances of the case and in law, in upho .....

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e computing book profits for the purposes of Section 115JB of the Act holding that the said provisions were unascertained, without appreciating the fact that the said provisions have been made on the basis of actuarial valuation. 3. The Ld. CIT(A) has erred on the facts and circumstances of the case and in law, in confirming the adjustment on account of provisions for bad debts amounting to ₹ 64,363,560 while computing book profits for the purposes of Section 115JB of the Act. 4. The Ld. C .....

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in this regard. The Appellant carves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to law. 4. The grounds raised in the departmental appeal reads as under: 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the assessing officer to allow depreciation without reducing depreciation for the AYs 199 .....

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ct, 1961. 4. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 10,90,98,495/- by holding that the expenditure on neon sign and glow signs is of revenue nature. 5. The appellant craves to be allowed to add, delete or amend any ground of appeal mentioned above. 5. First ground of the assessee s appeal was not pressed so it is dismissed as not pressed. 6. Vide Ground No. 2, the grievance of the assessee relates to the adjustment on .....

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2836 & 4988/Del/2004 in assessee s own case for the assessment year 2000-01 and same view was taken for the assessment year 2001-02 in ITA Nos. 5722, 5663 & 4989/Del/2004 vide order dated 31.12.2009. A reference was made to page nos. 235 to 286 of the assessee s paper book. It was also stated that the issue relating to the disallowance of gratuity has been admitted by the Hon ble Jurisdictional High Court vide order dated 02.07.2012 in ITA No. 739/2010. 7. The ld. DR in his rival submis .....

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een given in paras 33 & 34 of the order dated 31.12.2009 which read as under: 33. We have carefully considered the rival submissions in the light of material placed before us. It has been the contention of the assessee right from the beginning that a cumulative sum of ₹ 97,84,178/- (Rs.68,23,350/- on account of gratuity and ₹ 29,60,828/- on account of leave encashment) was debited to the Profit & Loss account. Out of the said sum assessee itself has added back the gratuity of .....

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e year under consideration to the profit and loss account relating to schedule 10 in the balance sheet of the assessee, the addition cannot be made for computing book profit u/s 115JA. It is the case of the assessee that provision of gratuity of ₹ 68,23,350/- was though debited to the P&L account but it was again added while computing the income under the normal provisions. Copy of computation of income has been filed by the assessee at pages 107 to 110 of the paper book. It is observe .....

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g book profit u/s 115JA was required to be made. However, so as it relates to another component i.e. a sum of ₹ 29,60,828/- the claim is made by the assessee on the basis of actuarial valuation. It has not been shown by the department that there was any defect in such valuation. It has not been shown by the department that there was any defect in such valuation made by the assessee. If it is so then this claim of the assessee has to be accepted in the light of decision of Hon ble Supreme C .....

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ting to ₹ 29,60,888/-. To conclude our findings on this ground are that (i) Opening balance standing to provision for staff benefits, if not debited to the P&L account of the year under consideration, could not be considered for addition while computing profit u/s 115JA. (ii) Provision for gratuity being not ascertained liability was to be added while computing book profit u/s 115JA. (iii) Liability of ₹ 29,60,828/- on account of provision for leave encashment being a liability b .....

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on the findings of the ITAT in assessment year 2000-01, defects in the report and the claim of assessee that in assessment year 2000-01, a miscellaneous application has already been filed. We deem it appropriate to set aside this issue to the file of the Assessing Officer for re-adjudication. Assessee will submit the actuarial report afresh to the Assessing Officer. Assessing Officer shall consider the order of the ITAT in assessment year 2000-01 also. This ground of appeal is partly allowed. 9. .....

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he assessee as per the explanation 1 to Section 115JB of the Act. Accordingly, this issue is decided against the assessee. 11. Last issue Ground No. 4 relates to the confirmation of addition amounting to ₹ 12,07,218 made by the TPO on account of adjustment to the value of international transactions of export of guar gum and pet chips. 12. The facts related to this issue in brief are that the assessee during the year under consideration had exported goods falling under two categories namely .....

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(TNMM). A set of external comparables had been selected and the arithmetic mean of these comparables came to around 3.53%. The TPO was of the view that all the export of rice, chili paste and peanut butter were very different from those involved in export of pet chips and guar gum. According to the TPO the losses incurred by the assessee on sale of pet chips and guar gum were unjustified and in violation of the Arm s Length Standard. The TPO pointed out that the assessee had exported pet chips .....

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agreed to act as the importer. However, the TPO observed that the TP reports revealed that PWT had incurred losses on these transaction as it had sold the goods at the purchase price. He also observed that it had not even recovered the cost incurred on storage, transportation and interest. He further observed that the assessee had acted as a facilitator and provided limited service of getting the documents prepared and performed related coordination with the sellers. The TPO observed that the e .....

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I) and that a set of 10 external comparables had been chosen for benchmarking from public database, the mean margin of those comparables had been computed at 3.51%. The TPO also pointed out that as per the OECD guidelines of Transfer Pricing two or more transactions can be aggregated only when they are closely interlinked or continuous or form one integral whole and cannot be analyzed separately. Otherwise, transactions are ideally to be examined on standalone basis and that as per Transfer Pric .....

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d not justify the loss incurred by the assessee. As regards to the determination of quantum of mark-up, the TPO observed that to locate the comparables following search process was launched in the database PROWESS (a database maintained by CMIE): i) Companies engaged in business services, social and personal services, transport services, real estate services were identified; ii) Companies having no financial data or having latest financial data up to March 2001 were excluded; iii) Companies havi .....

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e as under: S.No. Companies Name 2002 1. I G E (India) Limited 28.93 2. Indiacom Limited 6.09 3. Interads Limited 2.18 4. International Travel House Limited 4.11 5. N I S Sparta Limited 9.32 6. Ujjwal Limited 2.24 7. Anusha Air Travels Ltd. 0.44 8. Hindustan Cargo Ltd. 22.40 9. Shanthi Sales Ltd. 1.72 10. M C S Ltd. 7.91 Arithmetic Mean 8.53 14. Accordingly, the arithmetic mean of the comparable companies worked out at 8.53% was considered as the arm s length mark-up to be applied on the costs i .....

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ssee would have earned a forex gain; and 3. The assessee was benefited by making such exports by getting star trading house status which is linked to the export turnover amounts. 15. The TPO did not find merit in the above objections of the assessee by observing as under: 8.1 None of these arguments justify the assessee s incurring of losses on sale of pet chips and guar gums. PWT may have incurred losses but there is no justification for the assessee to incur losses and for not getting remunera .....

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ions. 8.2 Shifting of profits need not only be done by making improper division of profits earned in a transaction by the efforts of two Associated Enterprises. By not remunerating an AE for a service also amounts to shifting of profits because, but for the controlled relationship, such remuneration would have been paid and would have been subject to tax in India. By pointing out that PWT did not earn profits from the transactions the assessee is impliedly using profit split method. Use of this .....

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the opposite direction, the assessee would have earned forex gain. The assessee while allowing the trading transaction to be passed through it was not speculating on forex fluctuations. To expose it to forex gain and loss would amount to viewing the assessee as a forex speculator. Such a characterization is contrary to its true economic role in respect of these transactions. 8.4 As regards the benefit of getting star trading house status, it is observed that this fact does not find mention in th .....

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Length Price adjustment to be added to the income of the assessee at ₹ 12,07,218/- by observing as under: The assessee in its capacity as a service provider should be recovering the costs incurred in procuring the goods since this is only a pass through entity and a markup of 8.53% on the costs incurred in providing the services. The computation of Arm s Length Price is given as under: Losses incurred on providing the service (A) (that portion of the price which was not reimbursed) Rs.1,1 .....

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tal income of the assessee. The AO concurred with the view of the TPO and made the addition of ₹ 12,07,218/-. 17. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: The learned Assessing Officer confirmed the addition made by the learned TPO without giving an opportunity to the appellant as required in terms of the Act/instructions of the CBDT. The learned Assessing Officer has erred in confirming the addition made by the learned TPO disregarding the .....

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it necessary or expedient to do so. Also, proviso to section 92C(3) of the Act makes it crystal clear that the AO shall in the first instance, make all attempts to determine the arm s length price on the basis of the information available with him. It is clear from the said section that it is incumbent upon the AO to clearly ascertain the necessity of such a reference to the TPO. However, in the instant case, since no recorded reasons were provided to the appellant before referring the matter to .....

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ircle- 11(1), Bangalore in ITA Nos. 584, 585/Bangalore/2006 dated 12.06.2007, confirmed the addition made by the AO by observing as under: In the present case, the TPO after receiving a reference from the AO on the basis of his prima facie view, examined various documents and then came to form a considered view that the ALP in respect of the international transaction of the appellant needs to be recomputed. As a result of such a view, TP adjustments of ₹ 12,07,218 was proposed by the TPO. .....

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urring with the findings of the TPO. 19. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the AO/TPO were wrong in stating that the losses incurred by the assessee on export of guar gums and pet chips were unjustified and in violation of the arm s length standard and not appreciating the fact that no profit had been shifted out of India. It was further stated that the assessee enjoyed Star Export House status, hence in order to retain the said status it had to expor .....

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ies were sold to PWT at the same price at which the assessee purchased from the Indian market. Hence the structuring of the transaction was such that the assessee could never make any profit or incur any loss in this transaction to insure that the assessee retained the Star Export House status. It was contend that the loss had been incurred on account of exchange rate fluctuations which had been accounted for under the nomenclature of forex loss. The ld. Counsel for the assessee referred to page .....

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in ITA No. 3547/Del/2010 for the assessment year 2003-04, order dated 10.07.2015 and DCIT Vs Global Vantedge Pvt. Ltd. in ITA Nos. 1432 & 2321/Del/2009 and 116/Del/2011, Copy of the said order was furnished which is placed on the record. It was further stated that the said order in the case of DCIT Vs Global Vantedge Pvt. Ltd. (supra) has been affirmed by the Hon ble Delhi High Court and the SLP has been dismissed by the Hon ble Apex Court. 20. In his rival submissions the ld. DR strongly s .....

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ket. On a similar issue the ITAT Delhi Bench in the case of DCIT Vs Global Vantedge P. Ltd. in ITA Nos. 1432 & 2321/Del/2009 and 116/Del/2011 (supra), held that adjustment on account of arm s length price of international transactions cannot exceed the amount received by the Associated Enterprises from the customer and the actual value of international transactions i.e. amount received by the assessee in respect of international transactions. The said decision of the ITAT Delhi Bench has bee .....

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e case of DCIT Vs Global Vantedge Pvt. Ltd. has dismissed the appeal of the Revenue. In the present case also the assessee had not gained, the AE had not paid anything and the commodities were sold to the AE at the same price at which those were purchased from the local market, just to retain the Star Export House status. The loss incurred by the assessee was only on account of foreign exchange fluctuation. The structure of the transaction was such for the assessee that it could not make any pro .....

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rn sold the commodities to the customers at the same price at which these were bought from the assessee. Therefore, the international transactions with PWT met the arm s length standard. Therefore, by keeping in view the totality of the facts as discussed herein above the addition sustained by the ld. CIT(A) is deleted. Now we will deal with the Departmental appeal in ITA No. 945/Del/2010 22. First issue in this appeal relates to the re-computation of depreciation. The ld. Counsel for the assess .....

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ntention of the Revenue is that explanation 5 to Section 32(i) of the Income Tax, which is inserted with effect from 01.04.2002 was clarificatory in nature and therefore the Assessing Officer has rightly disallowed the depreciation. Fact remains that in the previous years, i.e., in the year 1995-1996 and 1996-97, the Assessee had not claimed any depreciation. When the assessment order in question was in the assessment year 1997-1998, bringing down the value of the asset purchased by showing noti .....

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ailable on the record, it is noticed that this issue has been decided by the Hon ble Jurisdictional High court vide aforesaid order dated 09.03.2011. Therefore, in view of the ratio laid down by the Hon ble Jurisdictional High Court in assessee s own case, we do not see any merit in this ground of the departmental appeal. 25. Vide Ground No. 2, the grievance of the department relates to the allowability of the expenditure u/s 37(1) of the Act. 26. The facts related to this issue in brief are tha .....

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. Now the department is in appeal. During the course of hearing the ld. Counsel for the assessee at the very outset stated that this issue had been allowed in favour of the assessee by the Hon ble Jurisdictional High Court in assessee s own case for the assessment year 2000-01 vide order dated 10.03.2011 in ITA No. 157/2008 (copy of which is placed at page nos. 147 & 148 of the assessee s paper book). The aforesaid contention of the ld. Counsel for the assessee was not controverted by the ld .....

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issue their lordships observed as under: We have heard learned counsel for the parties at length on proposed question No. (D). The dispute is as to whether the expenditure of ₹ 24,88,705/- on the improvement of lease hold premises in Maharashtra office of the respondent/assessee was entitled 100% depreciation under Section 32 of the Act. The assessing Officer had allowed depreciation only @ 10% on the ground that the expenditure was capital in nature with a purpose of securing benefit of e .....

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th the view of ITAT that the expenditure incurred was for erecting temporary wooden structure etc. Such an expenditure would be revenue in nature even if the depreciation thereupon is to be allowed, as per Appendix-I to the Income Tax Rules. We may note herewith that the ITAT has stated that expenditure incurred on lease hold premises was in respect of construction of walls, partition and plastering of walls? It was a specific case put forward by the assessee that these structures were temporary .....

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n of addition of ₹ 8,02,000/- being 1/10th of preliminary expenses. 32. The facts related to this issue in brief are that during the course of assessment proceedings the AO noticed that the assessee had paid an amount of ₹ 80,19,475/- in the financial years 1993-94 and 1994-95 (i.e. prior to commencement of business) to the Registrar of Companies (ROC Delhi and Haryana) for incorporation and registration of company. The assessee claimed 1/10th of the expenditure i.e. ₹ 8,02,000 .....

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. Vs CIT 225 ITR 798 (SC) 33. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the addition by following the decision of the ITAT in ITA No. 1226/Del/2003 for the assessment year 1999-2000, order dated 28.03.2005. 34. Now the department is in appeal. The ld. DR strongly supported the orders of the authorities below while the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that this issue has been decided .....

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the departmental appeal for the assessment year 1998-99 in ITA No. 574/2007 before the Hon ble Jurisdictional High Court wherein vide order dated 09.03.2011, their lordships in paras 2 & 3 observed as under: 2. In so far as first is concerned, the Assessing Officer disallowed the amortization of the expenses of ₹ 8,02,000/- under Section 35D of the Income-tax Act. The Assessing Officer wrongly presumed that the expenses incurred were the fee payable on account of increase in share capi .....

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circumstances, there is no reason to disallow the same as it is clear that the Revenue had accepted to amortize the aforesaid expense over a period of ten years and, therefore, for all these ten years, the expenditure is eligible for deduction under Section 35D of the Act. No question of law arises. 36. Since this issue has been settled by the Hon ble Jurisdictional High Court, we, therefore, do not see any merit on this issue in the appeal of the department because the year under consideration .....

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count of glow signs and neon sign etc. The AO disallowed the said expenses incurred on glow signs and neon signs alleging the same to be capital in nature as the same were semi-permanent fixture on numerous retail out lets, which were selling the products of the assessee and providing enduring benefit of the assessee. The AO accordingly treated the expenditure as capital in nature but allowed depreciation thereon. 39. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted .....

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